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Food vs. fuel?

Is ethanol the answer for what ails our energy economy? Or could the ethanol boom destabilize grain markets, and even governments? In a report issued today, the Washington-based Earth Policy Institute says a rapid rise in the demand for corn - the current crop of choice for ethanol production - could stir up global economic chaos, and soon.

AP

A handful of corn is shown before it is processed at the Tall Corn Ethanol plant in Coon Rapids, Iowa.

"If there are enough urban food riots in the world, it would create a very difficult situation with potentially a lot of instability, and perhaps on a scale that could disrupt global economic progress. ... We're not talking about something five or 10 or 15 years down the road, we're talking about something that might happen in a year or two," Lester Brown, the institute's president and a longtime environmental campaigner, told me today.

The source of Brown's concern is the sharply increasing investment in ethanol production facilities. Some energy industry analysts see fuel-quality grain alcohol - distilled primarily from corn - as one of the best alternatives to foreign oil. Last year, President Bush's Advanced Energy Initiative gave a multimillion-dollar boost to ethanol production.

That buzz over ethanol has really taken hold, and everyone agrees that corn prices will rise as a result. In fact, that's happening already. But how high will those prices go?

Almost a year ago, the U.S. Department of Agriculture estimated that the nation's ethanol distilleries would require 60 million tons of corn from the 2008 harvest. The Earth Policy Institute factored in the additional investment in facilities since then, and came up with a figure of 139 million tons - more than twice as much. That includes:

The institute's estimate of current annual production levels, 53 million tons used by 116 plants.

Expansion of existing facilities, which would increase requirements by 8 million tons.

Production by 79 plants under construction, requiring another 51 million tons.

Another 27 million tons of corn that would be consumed by distilleries currently in the planning stage and scheduled for completion by September 2008.

The institute's report notes that the increased demand for corn will affect not only prices for that commodity, but for other crops as well. Rapidly rising prices for grain could spark trouble abroad, it says:

"The competition for grain between the world's 800 million motorists who want to maintain their mobility and its 2 billion poorest people who are simply trying to survive is emerging as an epic issue. Soaring food prices could lead to urban food riots in scores of lower-income countries that rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria and Mexico. The resulting political instability could in turn disrupt global economic progress, directly affecting all countries. It is not only food prices that are at stake, but trends in the Nikkei Index and the Dow Jones 500 as well."

How bad could things really get? Is the report too alarmist? Well, the Agriculture Department's chief economist shares Brown's concerns - up to a point.

During a Senate hearing in September, chief economist Keith Collins told lawmakers that the ethanol boom is indeed exceeding the department's long-term projections. To keep markets stable, America's farmers will have to produce more corn, and other exporters will have to raise their output as well, Collins said.

"The corn sector will be highly vulnerable to market disruptions - ethanol plants and other users will be operating in a much riskier environment than we have today," he said.

But Collins is more confident that the market will be able to sort things out. Today he told The Associated Press that the Earth Policy Institute was making "a valid point," but took issue with its estimate of future demand. "That strikes me as high," he was quoted as saying.

If corn prices rise, the euphoria over ethanol would likely settle down, and some of the distilleries currently being planned may never be built. Congress could also conceivably adjust the current ethanol subsidy to fine-tune the economics.

Whether or not an ethanol apocalypse is looming, Brown said the U.S. government and the industry needed to develop a much more precise picture of the ethanol energy market.

"The reality is that whether it's farmers or ethanol investors, or food processors or feeders, people have been making decisions in financial terms based on a misleading sense of what the corn market is going to look like," he told me.

The report calls for a "moratorium on the licensing of new distilleries, a time-out, while we catch our breath and decide how much corn can be used for ethanol without dramatically raising food prices." That kind of industrial policy may not fly in the current political environment, but several other recommendations from the report provide additional food for thought:

Putting much more effort into producing ethanol from non-food sources of cellulose, such as switchgrass, wood chips and cornstalks. This is already a major thrust of the Advanced Energy Initiative.

Investing in wind farms to provide the electricity for next-generation automobiles. "U.S. cars could run primarily on wind energy - and at the gasoline equivalent of less than $1 a gallon," the report said.

What do you think? How do you separate the wheat from the chaff (or the corn from the stalks) in the energy debate? Feel free to add your comments below.